RELIANCE CONSOLIDATED ENTERPRISES PVT LTD, Mumbai V. ACIT OSD RG 3(3), Mumbai

ITA 5145/MUM/2003

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3790 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-11-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 10-11-2010
• Assessment Year: 1999-2000
• Appeal Filed On: 10-07-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: J D MISTRY
• Keywords: Earning of tax free income; Set aside
• Section: 14A; 10

Judgement Text

1 ITA NO5069 &5145/M/2003 I II IN THE INCOME TAX APPELLATE TRIBUNAL N THE INCOME TAX APPELLATE TRIBUNAL N THE INCOME TAX APPELLATE TRIBUNAL N THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH MUMBAI BENCH MUMBAI BENCH MUMBAI BENCH E EE E MUMBAI MUMBAI MUMBAI MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI R R R R K PANDA, AM K PANDA, AM K PANDA, AM K PANDA, AM & SHRI V DURGA RAO, JM & SHRI V DURGA RAO, JM & SHRI V DURGA RAO, JM & SHRI V DURGA RAO, JM IT ITIT ITA NO A NO A NO A NO. . . . 5069/MUM/2003 5069/MUM/2003 5069/MUM/2003 5069/MUM/2003 (ASSESSMENT YEAR 1999-00) THE DY COMM OF INCOME TAX RANGE 3(3), MUMBAI VS RELIANCE CONSOLIDATED ENTERPRISES P LTD 84A MITTAL COURT NARIMAN POINT MUMBAI 21 ITA NO. ITA NO. ITA NO. ITA NO. 5145/MUM/2003 5145/MUM/2003 5145/MUM/2003 5145/MUM/2003 (ASSESSMENT YEAR 1999-00) RELIANCE CONSOLIDATED ENTERPRISES P LTD 84A MITTAL COURT NARIMAN POINT MUMBAI 21 VS THE DY COMM OF INCOME TAX RANGE 3(3), MUMBAI (APPELLANT) (RESPONDENT) PAN PAN PAN PAN AAACM28 AAACM28 AAACM28 AAACM2825L 25L 25L 25L ASSESSEE BY: SHRI J D MISTRY REVENUE BY: SHRI D SONGATE O OO O R RR R D DD D E EE E R RR R PER PER PER PER R RR R K PANDA K PANDA K PANDA K PANDA: :: : THESE ARE CROSS APPEALS THE FIRST ONE FILED BY TH E REVENUE AND THE SECOND ONE FILED BY THE ASSESSEE AND ARE DIRECTED AGAINST THE ORDER DATED 10.4.2003 OF THE CIT(A)-III, MUMBAI RELATING TO ASSESSMENT YEAR 1999-00. 2 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN DEALING IN SHARES AND SECURITIES. IT HAS SHOWN INCO ME FROM SALE OF SHARES, DIVIDEND INCOME, INTEREST ON DEBENTURES AND MISCELL ANEOUS INCOME ETC. THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE COMPANY HAS RECEIVED DIVIDEND INCOME OF ` 1,01,21,075/- OUT OF WHICH IT HAS CLAIMED AN AMOUNT OF ` 1,01,11,259 AS EXEMP T. ON BEING QUESTIONED BY THE ASSESSING OFFICER AS TO WHY THE ADMINISTRATIVE EXPENSES SHOULD BE ALLOWED, THE ASSESSEE SUBMITTED THAT THE ADMINISTRATIVE EXPE NSES AND THE INTEREST ON BORROWING ARE NOT BEING INCURRED BY THE ASSESSEE CO MPANY IN RELATION TO INCOME 2 ITA NO5069 &5145/M/2003 WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT W AS SUBMITTED THAT VARIOUS EXPENSES CLAIMED BY THE ASSESSEE HAVE BEEN INCURR ED IN THE NORMAL COURSE OF BUSINESS AND ARE INDEPENDENT OF ANY EXEMPT INCOME A ND NO PART OF IT IS REQUIRED TO BE ATTRIBUTABLE TO EARNING OF DIVIDEND INCOME. HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE EXPLAN ATION GIVEN BY THE ASSESSEE. HE NOTED THAT THE ASSESSEE HAS CLAIMED AN AMOUNT OF ` 5.78 LAKHS TOWARDS THE ADMINISTRATIVE EXPENSES, THEREFORE, SOME PORTION OF THE SAME MUST HAVE BEEN INCURRED FOR THE PURPOSE OF EARNING DIVIDEND INCOME . HE ACCORDINGLY DISALLOWED AN AMOUNT OF 1 LAKH ON ADHOC BASIS OUT OF THE ADMIN ISTRATIVE EXPENSES. 2.1 THE ASSESSING OFFICER FURTHER NOTED THAT THE AS SESSEE HAS DEBITED INTEREST OF ` 69.71 LAKHS. HE ASKED THE ASSESSEE TO EXPLAIN THE ALLOWABILITY OF THESE EXPENSES. IT WAS EXPLAINED BY THE ASSESSEE THAT T HE COMPANY HAS RECEIVED DIVIDEND OF ` 1,01,21,075/- ON SHARES OF RELIANCE INDUSTRIES LTD, RELIANCE CAPITAL LTD AND UTI UNITS 1964. ALL THESE SHARES WERE PURC HASED DURING THE EARLIER YEARS. THE COMPANY HAS NOT INVESTED ANY AMOUNT DUR ING THE RELEVANT PREVIOUS YEAR IN ANY OF THE SHARES MENTIONED ABOVE ON WHICH DIVIDEND INCOME WAS RECEIVED. FURTHER, DIVIDEND WARRANTS ARE EN-CASHA BLE AT PAR AND THE EARNING OF DIVIDEND INCOME IS INCIDENTAL TO HOLDING OF THE SHA RES. IT WAS SUBMITTED THAT THE EXPENSES CHARGED TO THE P&L ACCOUNT ARE MAINLY IN T HE NATURE OF FINANCIAL AND ADMINISTRATIVE EXPENSES INCURRED FOR THE PURPOSE OF CARRYING ON THE BUSINESS. THE INVESTMENT GIVING RISE TO THE DIVIDEND INCOME, WHICH HAS BEEN CLAIMED AS EXEMPT U/S 10(33) WERE IN FACT MADE IN THE PRIOR YE ARS AND NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EARNING OF EXEMPTED DI VIDEND INCOME. 3 ITA NO5069 &5145/M/2003 2.2 HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE NOTED THAT THE FUNDS WER E BORROWED DURING THE COURSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE AND INTEREST HAS BEEN PAID ON THOSE FUNDS WHICH ARE UTILIZED FOR INVESTMENT IN BU SINESS. SINCE INVESTMENT IN SHARES RESULTS INTO DIVIDEND INCOME, THE INTEREST P AID ON BORROWINGS IS HELD TO BE HAVING BEEN INCURRED IN RESPECT OF EARNING OF EXEMP T INCOME. HE, ACCORDINGLY DISALLOWED THE ENTIRE AMOUNT OF ` 69.71 LAKHS AS HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING THE INCOME W HICH HAS BEEN CLAIMED AS EXEMPT. 2.3 IN APPEAL, THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE ADMINISTRATIVE EXPENSES OF ` 1 LAK H ON AD-HOC BASIS AS ATTRIBUTABLE TO EARNING OF DIVIDEND INCOME. HOWEVE R, AS REGARDS THE DISALLOWANCE OF INTEREST INCOME OF ` . 69.71 LAKHS, HE DIRECTED THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO ` 6.99 LAKH S WHICH, ACCORDING TO HIM SHOULD BE CALCULATED ON THE BASIS OF THE FOLLOWING FORMULA : TOTAL INTEREST X DIVIDEND BEARING INVESTMENTS TOTAL INVESTMENTS ` 69.71 LAKHS X ` 991.05 LAKHS ` 9888.09 LAKHS = ` 6.98 LAKHS 3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) GIVING PA RT RELIEF, THE REVENUE AS WELL AS THE ASSESSEE ARE IN APPEAL HERE BEFORE US WITH THE FOLLOWING GROUNDS: ITA NO.5069/MUM/2003 (BY THE REVENUE): ITA NO.5069/MUM/2003 (BY THE REVENUE): ITA NO.5069/MUM/2003 (BY THE REVENUE): ITA NO.5069/MUM/2003 (BY THE REVENUE): ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO APP ORTION THE INTEREST IN THE RATIO OF INVESTMENT ON WHICH DIVIDEND IS EARNED TO THE TOTAL INVESTMENT, 4 ITA NO5069 &5145/M/2003 WITHOUT APPRECIATING THE FACTS DISCUSSED IN THE ASS ESSMENT ORDER AND HAS THUS ERRED IN REDUCING THE INTEREST DISALLOWABLE FR OM ` 69.71 LACS TO ` 6.98 LACS INCREASING THE EXEMPTION AVAILABLE U/S 10 (33) ITA NO.5145/MUM/2003 (BY THE ASSESSEE): ITA NO.5145/MUM/2003 (BY THE ASSESSEE): ITA NO.5145/MUM/2003 (BY THE ASSESSEE): ITA NO.5145/MUM/2003 (BY THE ASSESSEE): 1. THE ORDER PASSED BY THE CIT(A) IS ILLEGAL, BAD IN LAW, ULTRA VIRES AND CONTRARY TO THE PROVISIONS OF LAW AND FACTS OF THE CASE AND WITHOUT APPRECIATING THE FACTS OF THE CASE IN THEIR PROER P ERSPECTIVE. 2 A) THE LD CIT(A) ERRED IN CONFIRMING ALLOCATION OF EXPENSES AMOUNTING TO ` 1.00 LAKH AND ALSO CONFIRMING INTER EST EXPENSES TO THE EXTENT OF `. 6.98 LAKHS OUT OF ` 69.71 LAKHS TREATED BY THE ASSESSING OFFICER AS INCURRED IN RELATION TO EARNIN G OF DIVIDEND INCOME AND THEREBY RESTRICTING THE EXEMPTION U/S 10 (33) TO THAT EXTENT. (B) THE LD CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN REDUCING THE EXEMPTED DIVIDEND INCOME TO THE EXTENT OF ALLOCATION OF INTEREST AND EXPENSES AMOUNTING TO ` 6.98 LAKHS AND ` 1 LAKH RESPECTIVELY WHILE WORKING OUT BOOK PROFIT U/S 115JA. 3 IT IS THEREFORE PRAYED THAT THE ORDER OF THE CIT( A) BE MODIFIED AND DIRECTION BE ISSUED TO ALLOW THE APPEAL N THE GROUN D RAISED BEFORE HIM. 4 THE LD COUNSEL FOR THE ASSESSEE REFERRING TO THE P&L ACCOUNT, PLACED AT PAGE 2 OF THE PAPER BOOK SUBMITTED THAT THE ASSESSE E COMPANY HAS CLAIMED OTHER EXPENSES AT ` 726.15 LAKHS. REFERRING TO PA GE 7 OF THE PAPER BOOK, HE DREW THE ATTENTION OF THE BENCH TO THE DETAILS OF A DMINISTRATIVE AND OTHER EXPENSES WHICH INCLUDE AN AMOUNT OF ` 720.37 LAKHS ON ACCOUNT OF DISCOUNT ON DEBENTURES. REFERRING TO PAGE 6 OF THE PAPER BOOK, HE SUBMITTED THAT THE ASSESSEE HAS DISCLOSED THE INTEREST ON DEBENTURES A T ` 710.80 LAKHS. REFERRING TO PAGE 10 OF THE PAPER BOOK, HE SUBMITTED THAT AN AMOUNT OF ` 69,70,926/- HAS BEEN PAID AS INTEREST TO RELIANCE CAPITAL LTD. RE FERRING TO PAGE 11 OF THE PAPER BOOK, HE SUBMITTED THAT THE ASSESSEE HAS RECEIVED D IVIDEND OF ` 1,01,21,075/- FROM RELIANCE INDUSTRIES LTD (` 85,86,956/0), RELI ANCE CAPITAL LTD ( ` 15,04,303/-) AND UTI, UNIT 1964 AT (` 29,816/ -). 5 ITA NO5069 &5145/M/2003 4.1 REFERRING TO PAGE 12 OF THE PAPER BOOK, HE SUBM ITTED THAT SCRIPS OF RELIANCE INDUSTRIES LTD WERE PURCHASED DURING THE P ERIOD FROM 31.3.1990 TO1.4.1996. SIMILARLY, SCRIPS OF RELIANCE CAPITALS LTD WERE PURCHASED DURING THE PERIOD FROM 29.10.1990 TO 29.3.1995 AND THE UTI-UNI TS 1964 WERE PURCHASED ON 21.12.1994. 4.2 REFERRING TO PAGE 13 OF THE PAPER BOOK, HE SUBM ITTED THAT THE COMPANY HAS STARTED BORROWINGS FROM 27.12.1997 WHICH IS MUC H AFTER THE PURCHASE OF SCRIPS OF RELIANCE INDUSTRIES LTD, RELIANCE CAPITAL S LTD AND UTI UNITS 1964. 4.3 REFERRING TO A SERIES OF DECISIONS AS PLACED O N THE PAPER BOOK, HE SUBMITTED THAT THE TRIBUNAL UNDER IDENTICAL CIRCUMS TANCES HAS DELETED THE ADMINISTRATIVE EXPENSES DISALLOWED U/S 14A OF THE I T ACT. AS REGARDS TO THE DISALLOWANCE OF INTEREST EXPENDITURE, THE LD COUNSE L FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2000- 01 AND SUBMITTED THAT THE TRIBUNAL IN THE SAID ORDE R WHILE UPHOLDING THE AD-HOC DISALLOWANCE OF ` 1 LAKH ON ACCOUNT OF ADMINISTRATI VE EXPENSES HAS DELETED THE PART OF INTEREST SUSTAINED BY THE CIT(A). HE SUBMIT TED THAT IN THE SAID ORDER, THE ASSESSING OFFICER HAD DISALLOWED THE ENTIRE INTERES T EXPENDITURE OF ` 46.07 LAKHS WHICH, THE CIT(A) HAD RESTRICTED TO 9.94 LAKHS. 4.4 THE LD DR, ON THE OTHER HAND STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 6 ITA NO5069 &5145/M/2003 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE PARTIES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND OUT OF THE TOTAL ADMINISTRAT IVE EXPENSES OF ` 5.78 LAKHS, THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF ` 1 LAKH ON AD-HOC BASIS ATTRIBUTABLE TOWARDS EARNING THE EXEMPTED DIVIDEND INCOME, WHICH THE CIT(A) HAS UPHELD. THE ADMINISTRATIVE EXPENSES OF ` 1 LAKH ON ADHOC BASIS, IN OUR OPINION IS REASONABLE UNDER THE FACTS AND CIRCUMSTA NCES OF THE CASE. 5.1 WE FURTHER FIND THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2000-01 HAS ALSO UPHELD THE SIMILAR DISALLOWANCE TO WHICH ONE OF US (ACCOUNTANT MEMBER) IS A PARTY. WE, THEREFORE, DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) IN UPHOLDING THE DISALLOWANCE OF ` 1 LAKH O UT OF THE ADMINISTRATIVE EXPENSES MADE BY THE ASSESSING OFFICER U/S 14A OF T HE ACT. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS DISM ISSED. 6 SO FAR AS THE GROUND RAISED BY THE ASSESSEE AND THE REVENUE ARE CONCERNED REGARDING THE ORDER OF THE CIT(A) IN REST RICTING THE DISALLOWANCE OF ` 6.98 LAKHS AS AGAINST ` 69.71 LAKHS DISALLOWED BY THE ASSESSING OFFICER, WE FIND THE ASSESSEE COMPANY HAS STARTED BORROWINGS F ROM 27.12.1997 ONWARDS WHEREAS THE SCRIPS ON WHICH TAX FREE DIVIDEND INCO ME EARNED WERE PURCHASED MUCH PRIOR TO THE SAME. WE FIND SIMILAR ISSUE HAD C OME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-01 AND THE TRIBUNAL WHILE DECIDING THE GROUND RAISED BY THE ASSESSEE HAS OBSE RVED AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY B OTH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. FROM THE DET AILS SUBMITTED BY THE LD COUNSEL FOR THE ASSESSEE IN THE PAPER BOOK WE FIND THE INVESTMENT IN SHARES OF RELIANCE INDUSTRIES LTD., RELIANCE CAPITA L LTD., TISCO, AND UNITS 7 ITA NO5069 &5145/M/2003 OF UTI 1964 ON WHICH DIVIDEND HAS BEEN RECEIVED BY THE ASSESSEE COMPANY AND CLAIMED TO BE EXEMPT HAVE BEEN MADE P RIOR TO THE DATE OF LOANS OBTAINED BY THE ASSESSEE COMPANY. THEREFORE, WE FIND MERIT IN THE SUBMISSION OF THE LD COUNSEL FOR THE ASSESSEE THAT NO PART OF THE BORROWINGS HAS BEEN INVESTED IN SHARES, THE DIVIDEN D INCOME OF WHICH IS EXEMPT FROM TAX AND THEREFORE, THE PROVISIONS OF SE C. 14A ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. WE, AC CORDINGLY SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND DIRECT THE AO NOT TO DISALLOW ANY AMOUNT ON ACCOUNT OF INTEREST BY APPLYING THE PROVI SIONS OF SEC. 14A OF THE ACT. HOWEVER, AS REGARDS THE ADMINISTRATIVE EXP ENSE, WE ARE OF THE CONSIDERED OPINION THAT THE DISALLOWANCE OF AN AMOU NT OF `. 1 LAKH ON ADHOC BASIS BEING ATTRIBUTABLE TOWARDS EARNING THE EXEMPTED DIVIDEND INCOME, UNDER THE FACTS AD CIRCUMSTANCES OF THE CAS E, IS JUSTIFIED. IN THIS VIEW OF THE MATTER, THE GROUNDS RAISED BY THE REVEN UE ARE DISMISSED AND THE ROUNDS RAISED BY THE ASSESSEE ARE PARTLY ALLOWE D. 7 SINCE ADMITTEDLY, ALL THE SHARES ON WHICH DIVIDEN D INCOME WAS EARNED AND CLAIMED AS EXEMPT WERE PURCHASED MUCH PRIOR TO THE AMOUNTS BORROWED BY THE ASSESSEE; THEREFORE, IN VIEW OF THE DECISION OF THE TRIBUNAL IN ASSESSES OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE, NO PART OF THE INTEREST IN OUR OPINION CAN BE DISALLOWED U/S 14A OF THE I T ACT. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AS SESSING OFFICER TO DELETE THE DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A OF THE I T ACT. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 8 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THE 19 TH , DAY OF NOV 2010. SD/- SD/- ( ( ( ( V DURGA V DURGA V DURGA V DURGA RAO RAO RAO RAO ) )) ) JUDICIAL MEMBER ( (( ( R K PANDA R K PANDA R K PANDA R K PANDA ) )) ) ACCOUNTANT MEMBER PLACE: MUMBAI : DATED: 19 TH , NOV 2010 RAJ* 8 ITA NO5069 &5145/M/2003 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI